Great Quarter For Getty Images

Getty Images, Inc. reported record first quarter revenue of $156.5 million, a 20.1%growth over the $130.3 million earned in the first quarter of 2003, and 16.4%growth over the $134.4 million in sales in fourth quarter 2003. Theybenefited significantly from the currency exchange rates, but even excludingthis currency benefit revenue still grew by 11%.

While the first quarter has often been much stronger than the quarterpreceeding it, this result was much higher than expected. In January Gettyhad told analysts to expect revenue in the range of $141 to $146 million for the quarter.

"Our strong results in the first quarter underscore the leverage in ourbusiness model and reinforces our optimism for 2004. The sales momentum andpositive market trends we began to see at the end of 2003 continuedthroughout the first quarter of this year, with revenue improvingconsecutively each month," said Jonathan Klein, Getty Images co-founder andCEO.

During the conference call Klein said the company had "record revenues inFebruary and again in March" and that there was no end-of-quarter pull backin purchasing as has often happened in pervious quarters. "Every day thereis more evidence that our customers are beginning to spend again onmarketing and communications. Our customers continue to describe their moodas cautiously optimistic. The flow of work is becomming more consistent andtheir clients are beginning to take a longer term view -- talking againabout annual budgets instead of quarterly budgets."

Operating income for the first quarter of 2004 grew 79.5 percent to $42.9million, or 27.4 percent of revenue, compared to $23.9 million or 18.4percent of revenue, in the same quarter last year as the company heldoperating expenses near year earlier levels.

Net income almost doubled to $26.1 million or $0.43 per diluted share, from$13.2 million or $0.23 per diluted share a year ago.

Business Outlook

The company's outlook remains positive about business conditions for thesecond quarter and the remainder of the year. Changes in currency exchangerates and seasonally lower sales typically experienced in the second quartermay negatively impact the company's second quarter revenues compared tofirst quarter revenues. The company expects to report revenue in the rangeof $148 million to $151 million. Excluding the effects of currency, thisrevenue guidance implies approximately 11 percent year over year growth. The company expects to report earnings per diluted share of $0.37 to $.40for the second quarter of 2004.

The company is raising guidance for all of 2004 to the range of $600 to $610million and earning per diluted share of $1.55 to $1.65. Just three months ago revenue for the year was estimated to be between $560 and $580 million.

Revenue Breakdown

Q3 2002

Q4 2002

Q1 2003

Q2 2003

Q3 2003

Q4 2003

Q1 2004

Rights Managed

56%

54%

55.9%

52%

50%

51%

51%

Royalty Free

28%

30%

27.7%

31%

33%

32%

32%

News/Sports/Entertain/Archival

9.3%

9.6%

10.5%

10.3%

Footage

5.5%

5.8%

5.5%

5.2%

Other (Assignment, etc.)

1.2%

1%

1%

1.5%

In the previous quarter Getty Images created new categories for Editorial usages and Footage that varied from what they had been reporting previously. Among the advantages of the new divisions are that it will be much easier to track Footage and Editorial growth in the future. However, for our historic charts we no longer have accurate percentages for Q2 and Q3 of 2003 and I have left those blocks blank. In the revenue chart below I have estimated revenue for these periods based on other figures that are available and I have put those estimates in parenthesis.

It should also be noted that the Editorial segment of revenue still does not cover all the revenue that is earned from Editorial customers. These customers also buy imagery from the Creative section of the site and no breakdown is provided that would give us an indication of how much of that type of imagery these editorial customers purchase.

It should also be noted that "Creative" revenue (RM and RF) has represented 83% of Getty's total since the beginning of 2003. The other categories combined remain at a stable 17% of total revenue.

The above percentages translate into the following dollar figures for the last seven quarters (in millions of dollars).

Q3 2002

Q4 2002

Q1 2003

Q2 2003

Q3 2003

Q4 2003

Q1 2004

Gross Revenue

$118.2

$117.7

$130.3

$127.7

$130.8

$134.4

$156.5

Rights Managed

$66.192

$63.56

$72.83

$66.4

$65.4

$68.5

$79.8

Royalty Free

$33.096

$35.31

$36.09

$39.59

$43.16

$43

$50.1

News/Sports/Entertain/Archival

$11

$11.7

($13.8)

($15)

$14.1

$16.15

Footage

$6.5

$8.15

($6.9)

($6.23)

$7.4

$8.1

Other (Assignment, etc.)

$1.33

$1.33

($1)

($1)

$1.4

$2.35

Revenue Growth

Royalty Free revenues grew 39% in the quarter compared to Q1 2003, and about 16.5% over Q4 2003. Sales of RM were up 8.4% when compared to Q1 2003, but there was a 16.4% increase when compared to Q4 2003.

Average Price Per Usage

CFO Liz Huebner said, "The average price-per-image (ppi) worldwide rose significantly in the quarter. For RM the average ppi was $605 compared with $550 for Q1 2003 and $552 for Q4 2003. For RF the average ppi was $193 compared with $131 for Q1 2003 and $165 for Q4 2003. The agerage pice for a film clip for the quarter was $627 and this was down from $641 in Q4 2003."

Image Used Chart

Q3 2002

Q4 2002

Q1 2003

Q2 2003

Q3 2003

Q4 2003

Q1 2004

ROYALTY FREE

Gross Revenue (millions)

$33.096

$35.31

$36.09

$39.59

$43.16

$43

$50.1

****81.7% ? online sales

$26.477

$28.25

$28.87

$31.67

$34.53

$34.4

$40.93

Price Per Image

$107

$132

$131

$139

$152

$165

$193

Number Images Licensed

247,449

214,015

220,381

227,842

227,171

208,484

212,072

RIGHTS MANAGED

Gross Revenue (millions)

$66.192

$63.56

$72.83

$66.4

$65.4

$68.5

$79.8

Price Per Image

$509

$479

$550

$567

$574

$552

$605

Number Images Licensed

130,043

132,693

132,418

117,108

113,937

124,094

131,900

Total Images Licensed

377,492

346,708

352,799

344,950

341,108

332,578

343,972

Percent RF

66%

62%

63%

66%

67%

63%

62%

Percent RM

34%

38%

37%

34%

33%

37%

38%

Volumes

**** Note: In the past we have been told that RF revenue from CD's and Virtual CD's was "about 20%" of the total RF revenue. This quarter we were told that the CD and Virtual CD revenue was 18.3% of total RF revenue. Thus, I have used this figure for Q1 2004. All the other figures on this line are based on 20% of revenue. This skews the number-of-images calculations somewhat.Nevertheless, I believe it is useful to have numbers to get some idea of trends.

Single images volumes for RF collections were down just under 3%. "This isnot surprising as, consistent with previous quarters, the decrease was dueentirely to a decline in volume from credit card customers. As we have saidbefore, losing these customers has had no impact on revenue. In fact revenuesfrom credit card customers continue to increase. We are working on a plan toturn around decline in volumes from this segment of our customer base andare confident that it will be addressed over the coming quarters," Huebner said.

It is certainly encouraging that the price-per-image used keeps going up,but the volume of uses seems to indicate that there are few, if any, new users out there, despite the improvement in the economy, the theory that the Internet is creating more demand, and very aggressive marketing by Getty Images.

Photographer's Choice

Klein said the year-over-year sales growth of the Photographer's ChoiceCollection (PC) has been more than 260%. Photographer's Choice was introduced inlate 2002 and in the Q1 2003 Klein said that the PC images had generatedover $1 million in revenue. The 260% growth would mean that in Q1 2004revenue for this collection was probably in excess of $3.6 million.

Today there are 9,310 images in the Photographer's Choice collection meaning that theaverage return per-image for the quarter was $386. It is also interestingthat there are a total of 375,004 RM images on site and they earned $79.8million in the quarter. This would mean that the average return per-imagefor all RM images being licensed by Getty was about $212.

The fact that the average return on PC images is 82% better than the average return on allimages is surprising for a couple of reasons. First, the search results areweighted very heavily against PC. As I pointed out in Story 578 lastSeptember, in the first 90 images of any search only 6 PC images appearwhile 20 of Stone, 18 of TIB and 15 of Taxi appear. Somehow, customers arefinding the PC images anyway -- and buying them. One other possibleconclusion from these figures is that photographers are better a pickingimages that will sell than Getty's picture editing staff.

Klein noted that, "there is significantly more interest (in PC from photographers)than we have been able to accommodate," and that the company has struggledto keep up with the photographer demand to add images to this collection.Nevertheless, clearly, the company is very pleased with the results fromPhotographer's Choice.

Editorial

The editorial segment of the business grew by 38% year over year and Klein attributed an important part of this growth to the partnerships they have developed with Time-Life Pictures, AFP, the NBA, and recently Manchester United, and Major League Baseball. He also made note of the two small Entertainment photography companies they acquired last year and the importance of celebrity imagery in the overall Editorial revenue.

Klein pointed out that most of their Editorial content comes from three major countries -- U.S. UK and Australia -- and that to expand sales in other geographic markets they need to expand their content from these markets."You will see more geographical expansion in the editorial part of our business as we focus on increasing our presence outside of our core countries," he said, and indicated that to get this content they will pursue more partnerships and in some cases small acquisitions.

In Q2 2004 they intend to launch a major upgrade of the editorial web site that will give customers a far greater ability to search, purchase anddownload imagery across all creative and editorial collections. This is expected to make it easier for Editorial customers to find the images they need and to further accelerate growth of the Editorial customer base.

Partners

The 3rd Party providers are now being called "Partners" in recognition that they are much more than 3rd Parties. "We have seen that the ability to bring together a broad range of content on one platform has benefits far greater than any of us had originally imagined," Klein acknowledged.

"We hear from customers that they do want to go to one site, but they need abroad and deep variety of imagery at the site. This is true of allcustomers -- editorial and creative and in all geographies."

"Of course it is particularly helpful for Editorial customers who have veryspecialized needs. Because our editorial customers require a broad range ofimagery, the breadth and depth of the imagery on our web site -- and thatprovided by both us and our partners -- is very important to us increasingour penetration into the editorial and publishing market segments."

One thing Selling Stock would like to know is the percentage of images on the site that belong to "Partners", and the percentage of revenue these images generate. We think that number is significant, but so far Getty isn't sharing that information. On the other hand we must thank Getty for all the statistics they do share because their numbers are very helpful in getting an understanding of the industry.

SGNA

Gross margin for the quarter was 72.0 percent, up farom 71.4 percent in thefirst quarter of 2003. Selling, general and administrative expenses (SG&A)totaled $54.7 million, up $1.4 million from the first quarter of 2003. As apercentage of revenue, SG&A declined substantially to 35.0 percent in thefirst quarter of 2004 compared to 41.0 percent in the same quarter lastyear. Excluding the effects of changes in currency exchange rates, SG&Adeclined $2.1 million from the first quarter of 2003.

Cash and short-term investment balances were $356.6 million at March 31,2004, up from $307.6 million at December 31, 2003.

For the first quarter of 2004, net cash provided by operating activitiesnearly doubled to $43.7 million from $22.0 million for the same period of2003. The acquisition of property and equipment amounted to $9.1 million,compared to $8.1 million in the first quarter of 2003.

Geographic Breakdown

The percentage of revenues from the Americas continued to decline and that from Europe increased due mostly to the continued weakness of the dollar relative to the euro rather than a change in buying habits.

Jim Pickerell is founder of www.selling-stock.com, an online newsletter that publishes daily. He is also available for personal telephone consultations on pricing and other matters related to stock photography. He occasionally acts as an expert witness on matters related to stock photography. For his current curriculum vitae go to: http://www.jimpickerell.com/Curriculum-Vitae.aspx.

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